QIP – the way Ahead

QIP – the way Ahead

The economic downturn has made it difficult for companies to raise funds. IPOs are now a thing of the past; QIPs are set to take over, opines Suresh.

Suresh S.

IInd Year, PGDM

The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty’.

The above quote signifies the importance of capitalization of opportunities in difficult situations. For India Inc., QIP (Qualified Institutional Placement) is the apt opportunity in these difficult times of recession for meeting their fund requirements.

Low cost homes and QIP are the latest buzzwords for the Indian realty companies. Not only for realty companies, but for other listed Indian companies also QIPs have become one of the best fund raising opportunities.

What is QIP?

Qualified institutional placement (QIP) is simply the means whereby a listed company can issue equity shares, fully and partly convertible debentures, or any securities other than warrants which are convertible to equity shares to a Qualified Institutional Buyer (QIB).

Apart from preferential allotment, this is the only other method of private placement whereby a listed company can issue shares or convertible securities to a select group of persons. However, it scores over other methods, as it does not involve many of the common procedural requirements such as the submission of pre-issue filings to the market regulator.

It was introduced to prevent listed companies in India from developing an excessive dependence on foreign capital. The complications associated with raising capital in the domestic markets had led many companies to look at tapping the overseas markets via Foreign Currency Convertible Bonds (FCCB) and Global Depository Receipts (GDR) to fulfill their needs. To keep a check on this process and to give a push to the domestic markets, QIPs were launched.

Who are eligible for subscribing and issuing?

QIBs including mutual funds, foreign institutional investors, banks, venture capital funds, domestic and international, provident and pension funds. Only listed companies are allowed to tap the QIP route, and promoters or parties related to promoter group are not allowed to subscribe to a QIP issue.

Regulations governing a QIP

To be able to engage in a QIP, companies need to fulfill certain criteria such as being listed on an exchange which has trading terminals across the country and having the minimum public shareholding requirements which are specified in their listing agreement.

During the process of engaging in a QIP, the company needs to issue a minimum of 10% of the securities issued under the scheme to mutual funds. Moreover, it is mandatory for the company to ensure that there are at least two allottees, if the size of the issue is up to Rs 250 crore and at least five allottees if the company is issuing securities above Rs 250 crore.

No individual allottee is allowed to have more than 50% of the total amount issued. Also no issue is allowed to a QIB who is related to the promoters of the company.

Sobering history

In 2006, market regulator allowed promoters to raise money through QIP issues after which many companies started availing this window for their fund requirements. As the market was in a better situation during 2006 & 2007, QIP placements were not much utilized or were not in the preferred fund raising platform for the Indian companies. Companies preferred IPOs as a medium to meet the capital requirements.

Until March 2008, IPOs were the happening thing in the market for fund raising. But after the economic slowdown, the numbers started diminishing. After Lehman Brothers collapsed in September 2008, the Capex and fund raising of the Indian companies through IPO started diminishing, as equity markets collapsed and companies eventually delayed their fund raising plans. As on March 2009, four companies raised money through IPO.

At the same time QIPs started to emerge as a medium for fund raising. Although there are a number of ways to avail capital, the speed with which a QIP can be executed makes it a popular means of raising money. A lot of companies slowly started opting for QIPs because it is a very fast process. The money raising can be done in as soon as a week. The second advantage is that there is no need of SEBI approval. Finally, the issue can be done closer to market price.

Out of the total 65 companies that collectively raised 6.87 billion USD through QIPs between 2006 and 2008, market price of as many as 52 companies declined from their offer price. Stocks are currently valued at 5.04 billion USD, 27% lower than the amount raised through the QIP issues.

It can be inferred from the charts that in 2007 there were a large number of QIPs which shows a downward trend in 2008, after the financial crisis.

In 2009, bolstered by improving investor sentiment and strong institutional interest, several cash-starved companies used the QIP route to raise thousands of crores to stay afloat. More such companies, especially in the real estate or infrastructure sectors, are looking to raise an estimated 7-9 billion USD in the next few months of the current financial year to cut their debt and improve return on investment in projects.

India Inc. had already raised almost 1.11 billion USD from three QIPs so far in 2009 and announced plans to raise another 4.5 billion USD. After Unitech, Indiabulls Real Estate and PTC India raised close to 1.11 billion USD through the QIP route. The Mumbai-based real estate company, Akruti City, plans to raise up to 0.5 billion USD through the QIP route to fund its projects in Mumbai that are currently under construction. HDIL and Orbit have already announced plans to raise 0.62 billion USD and 0.11 billion USD respectively. Apart from these, many other companies are mulling over QIP plans. All the above signal that QIP is a going to become significant fund raiser for India Inc.

Why India Inc going for QIPs?

First reason is ease of regulation. Second, if somebody tries to go and buy in the open market, the problem will be impact cost. For example, Unitech’s QIP was for about USD 325 million. So if somebody goes out and buys in the open market, it may end up running up the cost and ending up as an impact cost. Naturally, they have preferred a QIP route where they will get a guaranteed allotment.

In case of QIPs, when compared to a preferential allotment, there is no lock-in. One more question that may come is why companies and investors are choosing the QIP route, why not a preferential allotment? It’s because in case of preferential allotment, there is a one-year lock-in. In case of a preferential allotment, the price at which the preferential allotment has to be done is the average of six months or two weeks, whichever is higher. But in the case of a QIP, the pricing is the average of the last two weeks.

Also, the companies do QIPs where promoter’s holding is significant. Prices have gone up and promoters seem to see in the current market, that prices are closer to realistic and that's why they are going for QIP issues.

What has happened in the last one month?

Qualified institutional buyers (QIBs), who recently invested in placements of companies, have suffered serious losses due to the recent slide in stock markets.

In the last five weeks, the stock markets have been rather volatile with a downward bias. Market experts said that this could lead to a falling enthusiasm for QIPs. This is because the price will have to be the average of the last fifteen days' stock price, according to the Securities and Exchange Board of India's guidelines.

However, all of them have not suffered so badly. QIPs done in April and May have done quite well. Unitech, DLF and PTC have given positive returns while QIPs of those Bajaj Hindustan, Network 18 and Dewan Housing that were done in end 2008 and in first 3 months of 2009 have yielded negative returns

Table below lists down the impact of stock prices of companies those announced the stock QIPs.

Some of the scrips saw a sharp fall in prices due to offloading by institutional players, which were allotted shares earlier. Since QIPs are mostly sold at a discount and do not have a lock-in period, investors have the option of selling off. And March to mid-June would have been a good period to offload these stakes for a profit. But the sharp drop in the market has ensured that the many institutions with recent allotment of shares were unable to exit.

And there are over 30 other companies, who have received their shareholders' nod for such issues. These include Pantaloon Retail, JSW Steel, IndusInd Bank and S Kumars Educomp, who raised Rs 607 crore via private placement in second week of July 2009.

One key concern in QIPs is that unlike rights issue, it dilutes the stake of the existing shareholders. Hence, promoters whose stake is already low will not be very keen on the QIP route.

DIIs might participate because of the size in cash levels. The difference in the offer price for QIPs has not been at a substantial discount to market prices. So, averaging down their prices does not seem a compelling reason for institutions to participate. Whether or not they would participate would depend on the quality of the issue.

List of Companies planning for QIP currently

Current Buzz in the market about QIP

With the market for new share issues still comatose, QIPs have replaced IPOs as the chosen method in corporate India for raising money. Flood is only set to increase in the coming weeks. About 30 more QIPs with an estimated value of INR 40,000 crore are expected to hit the Indian market this year.

The biggest QIPs expected to take place are likely to be of Essar Oil (INR 10,000 crore) and Cairn India (INR 5,000 crore). The number of issues and the amounts raised could turn out to be a record for the Indian capital markets. The money raised via QIPs so far this year has crossed the volumes achieved for the whole of last year. Experts say the companies that were not in a position to raise money via more traditional avenues were mostly undertaking QIPs.

Many of the companies raising money through QIPs had taken debt at high interest rates and were looking for a means to pay these down. Experts also point out that for many companies strapped for growth capital, the process of raising money through a QIP appears attractive.

Future of QIP

In the coming months, volumes will be good for QIPs as real estate and infrastructure sectors might see more capital raising. QIPs, being cost-effective, will continue to happen as other products are more costly to execute. This should provide a means of raising capital for corporates and a good way for institutions to pick up stakes in companies. We might see retail companies also raising money through this route.

It's a win-win situation as institutions, many of which are existing investors in the issuing companies, get a chance to average out their investments. For example, if an institution had bought Unitech at its peak price, a subscription to the QIP now, which is priced substantially lower, will help it to reduce the cost of acquisition proportionately.

In the next few months, India Inc is expected to make a beeline as the state of economy and investor confidence improves for this route of raising funds, but much will depend on the direction of the stock market and the economy.